Ethics Case 21–7 - Ben Naegle - Where’s the cash? ● LO1 LO3
After graduating near the top of his class, Ben Naegle was hired by the local office of a Big 4 CPA firm in his hometown. Two years later, impressed with his technical skills and experience, Park Electronics, a large regional consumer electronics chain, hired Ben as assistant controller. This was last week. Now Ben’s initial excitement has turned to distress.
The cause of Ben’s distress is the set of financial statements he’s stared at for the last four hours. For some time prior to his recruitment, he had been aware of the long trend of moderate profitability of his new employer. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The trend he was just now becoming aware of, though, was the decline in cash flows from operations.
Ben had sketched out the following comparison ($ in millions):
Profits? Yes. Increasing profits? Yes. The cause of his distress

Ethics Case 20–5 Softening the blow ● LO1 LO2 LO3
Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday.
For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT’s financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.
“Larry (the company president) already is in the doghouse with shareholders,” Joy thought to herself. “When they see these numbers, they’ll hang him out to dry.”
“I wonder if he’s considered some strategic accounting changes,” she thought, after reflecting on the situation. “The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas.”
Required:
1. How would the actions contemplated contribute toward “softening” the bad news?
2. Do you perceive an ethical dilemma? What would be the likely impact of following up on Joy’s thoughts? Who would benefit? Who would be injured?

Analysis Case 20–10 - DRS Corporation - Various changes ● LO1 through LO4
DRS Corporation changed the way it depreciates its computers from the sum-of-the-year’s-digits method to the straight-line method beginning January 1, 2011. DRS also changed its estimated residual value used in computing depreciation for its office building. At the end of 2011, DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.
Required:
1. For each accounting change DRS undertook, indicate the type of change and how DRS should report the change. Be specific.
2. Why should companies disclose changes in accounting prin

Ethics Case 19–7 International Network Solutions ● LO6
International Network Solutions provides products and services related to remote access networking. The company has grown rapidly during its first 10 years of operations. As its segment of the industry has begun to mature, though, the fast growth of previous years has begun to slow. In fact, this year revenues and profits are roughly the same as last year.
One morning, nine weeks before the close of the fiscal year, Rob Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and ideas in Lane’s office.
Lane: About the Board meeting Thursday. You may be right. This may be the time to suggest a share buyback program.
Mashburn: To begin this year, you mean?
Lane: Right! I know Barber will be lobbying to use the funds for our European expansion. She’s probably right about the best use of our funds, but we can always issue more notes next year. Right now, we need a quick fix for our EPS numbers.
Mashburn: Our shareholders are accustomed to increases every year.
Required:
1. How will a buyback of shares provide a “quick fix” for EPS?
2. Is the proposal ethical? 3. Who would be affected

Communication Case 18–10 Should the present two-category distinction between liabilities and equity be retained? Group interaction. ● LO1
The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.
One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.
Required:
1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned.

Integrating Case 16–5 - Williams-Santana, Inc. - Tax effects of accounting changes and error correction; six situations ● LO1 LO2 LO8
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.
b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $

Ethics Case 17–6 - VXI International - 401(k) plan contributions ● LO1
You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees’ contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.
While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm’s investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”
Required:

Ethics Case 15–4 - American Movieplex - Leasehold improvements ● LO3
American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seats and carpeting. The question being discussed over break- fast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The com- pany controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant.
Keene: Why 25 years? We’ve never depreciated leasehold improvements for such a long period.
Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don’t need expenses to be any higher than necessary.
Keene: But isn’t that a pretty rosy estimate of these assets’ actual life? Trade publications show an average depreciation period of 12 years.
Required:
1. How would increasing the depreciation period affect American Movieplex’s income?
2. Does revising the estimate pose an ethical dilemma?

Ethics Case 14–8 - Hunt Manufacturing - Debt for equity swaps; have your cake and eat it too ● LO5
The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.”
The numbers he discussed with himself were fourth quarter losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecasts and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of damage.
Later that night he sat alone in his office, scanning and rescanning the preliminary financial statements on his computer monitor. Suddenly his mood brightened. “This may work,” he said aloud, though no one could hear. Fifteen minutes later he congratulated himself, “Yes!”
The next day he eagerly explained his plan to Susan Barr, controller of Hunt for the last six years. The plan involved $300 million in convertible bonds issued three years earlier.
Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we’d issue. I think we can produce a profit.
Barr: But Claude, our bondholders are not inclined to convert the bonds
Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price or converting to stock, they’ll all convert. We won’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either.
Required:
Do you perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who would benefit? Who would be injured?

ACC 306 Week 1 DQ2 Judgment Case 13-9
Judgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ● LO5 LO6
In the March 2012 meeting of Valleck Corporation’s board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year ended December 31. A veteran board member brought to the meeting a draft of a disclosure note that had been prepared by the controller’s office for inclusion in the annual report. Here is the note:
On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act. Subsequently, in June 2011, the EPA commenced a civil action with respect to the foregoing violation seeking civil penalties of approximately $853,000. The EPA alleges that Valleck exceeded applicable volatile organic substance emission limits. The Company estimates that the cost to achieve compliance will be $190,000; in addition the Company expects to settle the EPA lawsuit for a civil penalty of $205,000 which will be paid in 2014.

P 12–13 - Miller Properties - Equity method ● LO5 LO6
On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon Company’s 6 million outstanding common shares. Miller’s CEO became a member of Marlon’s board of directors during the first quarter of 2011.
The carrying amount of Marlon’s net assets was $66 million. Miller estimated the fair value of those net as- sets to be the same except for a patent valued at $24 million above cost. The remaining amortization period for the patent is 10 years.
Marlon reported earnings of $12 million and paid dividends of $6 million during 2011. On December 31, 2011, Marlon’s common stock was trading on the NYSE at $18.50 per share.
Required: